1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission file number: 000-21167
------------------------------
Chester Bancorp, Inc.
(Exact name of registrant as specified in its charter)
------------------------------
Delaware 37-1359570
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1112 State Street, Chester, Illinois 62233
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (618) 826-5038
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of outstanding shares of the registrant's Common Stock, par value
$.01 per share, was 1,279,684 on May 1, 2001.
================================================================================
2
FORM 10-Q
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets.......................................................... 4
Consolidated Statements of Income.................................................... 5
Consolidated Statement of Stockholders' Equity....................................... 6
Consolidated Statements of Cash Flows................................................ 7
Consolidated Statements of Comprehensive Income...................................... 8
Notes to Unaudited Consolidated Financial Statements................................. 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risks........................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 19
Item 2. Changes in Securities................................................................ 19
Item 3. Defaults upon Senior Securities...................................................... 19
Item 4. Submission of Matters to a Vote
of Securities Holders................................................................ 19
Item 5. Other Information.................................................................... 19
Item 6. Exhibits and Reports on Form 8-K..................................................... 19
Signature........................................................................................ 20
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3
4
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2001 and December 31, 2000
(Unaudited)
March 31, December 31,
Assets 2001 2000
------ ---- ----
Cash $ 1,070,313 $ 1,220,381
Interest-bearing deposits 4,218,537 4,417,973
Federal funds sold 23,130,000 6,050,000
------------- -------------
Total cash and cash equivalents 28,418,850 11,688,354
Certificates of deposit - 1,000,000
Investment securities:
Available for sale, at fair value (cost of $1,750,000 and $1,750,000 at 1,777,645 1,754,036
March 31, 2001 and December 31, 2000, respectively)
Held to maturity, at cost (fair value of $28,033,133 and $34,733,050 at 27,362,058 34,728,445
March 31, 2001 and December 31, 2000, respectively)
Nonmarketable securities 2,339,400 2,322,500
Mortgage-backed securities:
Available for sale, at fair value (cost of $4,898,609 and $5,132,377 at 4,952,819 5,097,460
March 31, 2001 and December 31, 2000, respectively)
Held to maturity, at cost (fair value of $10,746,688 and $10,417,435 at 10,664,759 10,487,947
March 31, 2001 and December 31, 2000, respectively)
Loans receivable, net of allowance for loan loss ($597,835 at 46,236,220 47,340,779
March 31, 2001 and $597,580 at December 31, 2000, respectively)
Accrued interest receivable 733,624 1,108,650
Office property and equipment, net 1,453,187 1,423,951
Other assets 510,509 627,423
------------- -------------
$ 124,449,071 $ 117,579,545
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Deposits
Non-interest bearing $ 2,947,590 $ 4,957,853
Interest bearing 95,752,032 92,033,633
Borrowed money 5,000,000 -
Accrued interest payable 240,755 187,733
Advance payments by borrowers for taxes and insurance 430,449 394,401
Accrued expenses and other liabilities 200,881 126,165
------------- -------------
Total liabilities 104,571,707 97,699,785
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized, 2,182,125 shares
issued at March 31, 2001 and December 31, 2000 21,821 21,821
Additional paid-in capital 21,402,481 21,393,214
Retained earnings, substantially restricted 15,362,029 15,252,238
Accumulated other comprehensive gain (loss) 50,750 (19,147)
Unearned ESOP shares (1,469,340) (1,483,080)
Unearned restricted stock awards (185,737) (227,286)
Treasury stock, at cost: 910,606 and 895,979 shares at
March 31, 2001 and December 31, 2000, respectively (15,304,640) (15,058,000)
------------- -------------
Total stockholders' equity 19,877,364 19,879,760
------------- -------------
$ 124,449,071 $ 117,579,545
============= =============
See accompanying notes to unaudited consolidated financial statements
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5
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended March 31, 2001 and 2000
(Unaudited)
Three Months Ended
------------------
March 31,
---------
2001 2000
---- ----
Interest income:
Loans receivable $ 988,389 $ 1,003,355
Mortgage-backed securities 246,782 321,059
Investments 573,962 598,899
Interest-bearing deposits and federal funds sold 212,019 29,528
---------- -----------
Total interest income 2,021,152 1,952,841
---------- -----------
Interest expense:
Savings deposits 1,109,302 959,769
Borrowed money 50,000 60,845
---------- -----------
Total interest expense 1,159,302 1,020,614
---------- -----------
Net interest income 861,850 932,227
Provision for loan losses -- --
---------- -----------
Net interest income after provision for loan losses 861,850 932,227
---------- -----------
Noninterest income:
Late charges and other fees 41,370 30,252
Gain (loss) on sale of investment securities, net 10,652 (22,969)
Gain on sale of mortgage-backed securities, net -- 1,139
Other 9,463 4,675
---------- -----------
Total noninterest income 61,485 13,097
---------- -----------
Noninterest expense:
Compensation and employee benefits 319,216 330,965
Occupancy 74,063 65,971
Data processing 38,338 42,973
Professional Fees 47,842 61,937
Advertising 12,772 9,774
Federal deposit insurance premiums 5,019 5,410
Other 79,841 75,956
---------- -----------
Total noninterest expense 577,091 592,986
---------- -----------
Income before income tax expense 346,244 352,338
Income tax expense 99,481 100,016
---------- -----------
Net income $ 246,763 $ 252,322
========== ===========
Earnings per common share - basic $ .22 $ .20
========== ===========
Earnings per common share - diluted $ .21 $ .20
========== ===========
See accompanying notes to unaudited consolidated financial statements.
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6
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 2001
(Unaudited)
Retained Accumulated
Common stock Additional earnings, other Unearned
-------------------- paid-in substantially comprehensive ESOP
Shares Amount capital restricted loss shares
------ ------ ------- ---------- ---- ------
Balance, December 31, 2000 2,182,125 $21,821 $21,393,214 $ 15,252,238 $(19,147) $(1,483,080)
Net income -- -- -- 246,763 -- --
Purchase of treasury stock -- -- -- -- -- --
Stock options exercised -- -- -- (763) -- --
Amortization of restricted stock awards -- -- -- -- -- --
Amortization of ESOP awards -- -- 9,267 -- -- 13,740
Dividends on common stock
at $.12 per share -- -- -- (136,209) -- --
Change in accumulated other
comprehensive loss -- -- -- -- 69,897 --
--------- ------- ----------- ------------ -------- -----------
Balance, March 31, 2001 2,182,125 $21,821 $21,402,481 $ 15,362,029 $ 50,750 $(1,469,340)
========= ======= =========== ============ ======== ===========
Unamortized Treasury Stock Total
restricted -------------- Stockholders'
stock awards Shares Amount equity
------------ ------ ------ ------
Balance, December 31, 2000 $(227,286) 895,979 $(15,058,000) $ 19,879,760
Net income -- -- -- 246,763
Purchase of treasury stock -- 15,500 (259,625) (259,625)
Stock options exercised -- (873) 12,985 12,222
Amortization of restricted stock awards 41,549 -- -- 41,549
Amortization of ESOP awards -- -- -- 23,007
Dividends on common stock
at $.12 per share -- -- -- (136,209)
Change in accumulated other
comprehensive loss -- -- -- 69,897
--------- ------- ------------ ------------
Balance, March 31, 2001 $(185,737) 910,606 $(15,304,640) $ 19,877,364
========= ======= ============ ============
See accompanying notes to unaudited consolidated financial statements.
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7
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months ended March 31, 2001 and 2000
(Unaudited)
March 31, March 31,
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 246,763 $ 252,322
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment 40,387 37,095
Deferred fees, discounts, and premiums (37,919) (7,226)
Stock plans 76,778 64,547
Increase in accrued interest receivable 375,026 291,007
Increase in accrued interest payable 53,022 3,712
Increase (decrease) in income taxes, net 93,830 (193,721)
(Gain)loss on sale of investment securities, net (10,652) 22,969
(Gain) on sale of mortgage-backed securities, net -- (1,139)
(Gain) on sale of real estate owned, net (701) (460)
Dividend on FHLB Stock (16,900) --
Net change in other assets and other liabilities (43,913) (75,470)
------------ -----------
Net cash provided by operating activities 775,721 394,096
------------ -----------
Cash flows from investing activities:
Principal repayments on:
Loans receivable 3,436,920 2,911,435
Mortgage-backed securities 1,072,679 1,312,630
Proceeds from the maturity of certificates of deposits 1,000,000 --
Proceeds from the maturity of investment securities available for sale 1,000,000 500,000
Proceeds from the maturity of investment securities held to maturity 16,080,431 3,340,000
Proceeds from the sale of investment securities available for sale 1,510,652 1,202,031
Proceeds from the sale of mortgage-backed securities available for sale -- 538,389
Cash invested in:
Loans receivable (2,231,962) (2,988,917)
Mortgage-backed securities held to maturity (997,672) --
Investment securities held to maturity (8,695,000) (2,700,000)
Investment securities available for sale (2,500,000) (1,479,389)
Purchase of office properties and equipment (69,623) (25,819)
------------ -----------
Net cash provided by investing activities 9,606,425 2,610,360
------------ -----------
Cash flows from financing activities:
Increase in savings deposits 1,708,136 1,321,212
Proceeds from (payments on) FHLB advances 5,000,000 (5,000,000)
Repayments of federal funds purchased -- (957,000)
Increase in advance payments by borrowers for taxes and insurance 36,048 148,948
Purchase of treasury stock (259,625) (695,126)
Dividends paid (136,209) (121,965)
------------ -----------
Net cash used in financing activities (6,348,350) (5,303,931)
------------ -----------
Net increase (decrease) in cash and cash equivalents 16,730,496 (2,299,935)
Cash and cash equivalents, beginning of period 11,688,354 5,837,300
------------ -----------
Cash and cash equivalents, end of period $ 28,418,850 $ 3,537,365
============ ===========
Supplemental information:
Interest paid $ 1,106,280 $ 1,016,902
Income taxes paid $ 5,651 $ 304,224
Noncash investing and financing activities:
Loans transferred to real estate acquired by foreclosure $ -- $ --
Interest credited to savings deposits $ 816,463 $ 635,009
See accompanying notes to unaudited consolidated financial statements.
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8
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
---------
2001 2000
---- ----
Net income $246,763 $ 252,322
Other comprehensive income, net of tax
Unrealized holding gain (loss) on
securities available for sale $ 63,293 $ (8,350)
Less adjustment for realized gains
included in net income $ 6,604 $ (13,535)
-------- ---------
Total other comprehensive income $ 69,897 $ (21,885)
-------- ---------
Comprehensive income $316,660 $ 230,437
======== =========
See accompanying notes to unaudited consolidated financial statements.
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9
CHESTER BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 2001 and 2000
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore, do not
include all information and notes necessary for a complete presentation of
financial position, results of operations, changes in stockholders' equity, and
cash flows in conformity with generally accepted accounting principles. However,
all adjustments (consisting only of normal recurring accruals) which, in the
opinion of management are necessary for a fair presentation of the unaudited
consolidated financial statements, have been included in the consolidated
financial statements as of March 31, 2001 and for the three months ended March
31, 2001.
Operating results for the three months ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001.
The Company has not included disclosures regarding specific segments
since management makes operating decisions and assesses performance based on the
Company as a whole.
(2) Earnings Per Share (EPS)
Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company.
The computation of EPS for the three months ended March 31, 2001 and
2000 follows:
Three Months Ended
March 31,
2001 2000
---- ----
Basic EPS:
Net income $ 246,763 $ 252,322
========== ==========
Average common shares outstanding 1,137,669 1,232,056
========== ==========
Basic EPS $ 0.22 $ 0.20
========== ==========
Diluted EPS:
Net income $ 246,763 $ 252,322
========== ==========
Average common shares outstanding 1,137,669 1,232,056
Dilutive potential due to stock options 30,832 33,081
---------- ----------
Average number of common shares
and dilutive potential common
shares outstanding 1,168,502 1,265,137
========== ==========
Diluted EPS $ 0.21 $ .20
========== ==========
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(3) Employee Stock Ownership Plan (ESOP)
During 1996, the Company established a tax-qualified ESOP. The plan
covers substantially all employees who have attained the age of 21 and completed
one year of service. In connection with the conversion to a stock corporation,
the ESOP purchased 174,570 shares of the Company's common stock at a
subscription price of $10.00 per share using funds loaned by the Company. All
shares are held in a suspense account for allocation among the participants as
the loan is repaid with level principal payments over 30 years. Shares released
from the suspense account are allocated among the participants based upon their
pro rata annual compensation. The purchases of the shares by the ESOP were
recorded by the Company as unearned ESOP shares in a contra equity account. As
ESOP shares are committed to be released to compensate employees, the contra
equity account is reduced and the Company recognizes compensation expense equal
to the fair value of the shares committed to be released. Dividends on allocated
ESOP shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt. Compensation
expense related to the ESOP was $23,007 and $22,998 for the three months ended
March 31, 2001 and 2000, respectively.
The ESOP shares as of March 31, 2001 are as follows:
Allocated shares 26,262
Committed to be released shares 1,374
Unreleased shares 146,934
------------
Total ESOP shares 174,570
============
Fair value of unreleased shares $ 2,442,778
============
(4) Restricted Stock Awards
On April 4, 1997, the Company adopted the 1997 Management Recognition
and Development Plan. The plan provides that 82,921 common shares can be issued
to directors and employees in key management positions to encourage such
directors and key employees to remain with the Company. Interest in the plan for
each participant vests in five equal installments beginning April 4, 1998. The
adoption of the plan has been recorded in the consolidated financial statements
through a $1,160,894 credit to additional paid-in capital with a corresponding
charge to a contra equity account for restricted shares. The contra equity
account is amortized to compensation expense over the vesting period.
Compensation expense was $41,549 for both the three months ended March 31, 2001
and 2000.
(5) Pending Adoptions
In September 2000, Statement on Financial Accounting Standards No. 140
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" was issued to replace Statement of Financial Accounting No. 125
which was issued in June 1996. Statement No. 125 addressed issues related to
transfers of financial assets in which the transferor has some continuing
involvement with the transferred assets or with the transferee. Statement No.
140 resolves implementation issues which arose as a result of Statement No. 125,
but carries forward most of Statement No. 125's provisions. Statement No. 140 is
effective for transfers occurring after March 31, 2001 and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. Management does not believe the adoption of Statement
No. 140 will have a significant impact on its financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The principal business of Chester Bancorp, Inc. and its
subsidiaries (the Company) consists of attracting deposits from the general
public and using these funds to originate mortgage loans secured by one-to
four-family residences and to invest in securities of the U. S. government,
mortgage-backed securities, and other securities. To a lesser extent, the
Company engages in various forms of consumer lending. The Company's
profitability depends primarily on its net interest income, which is the
difference between the interest income it earns on its loans, mortgage-backed
securities and investment portfolio and its cost of funds, which consists mainly
of interest paid on deposits, securities sold under agreements to repurchase,
federal funds purchased and FHLB advances.
The operations of the Company are significantly influenced by
general economic conditions and related monetary and fiscal policies of
financial institutions regulatory agencies. Deposit flows and the cost of funds
are influenced by interest rates on competing investments and general market
rates of interest. Lending activities are affected by the demand for financing
real estate and other types of loans, which in turn is affected by the interest
rates at which such financing may be offered and other factors affecting loan
demand and the availability of funds.
When used in this report the words or phrases "will likely
result," "are expected to," "is anticipated," "estimate," "project," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties, including, among other things,
changes in economic conditions in the Company's market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition, that could cause actual results to differ
materially from the historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically declines any
obligation, to publicly release the results of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
FINANCIAL CONDITION
ASSETS. The Company's total assets increased by $6.9 million,
or 5.8%, to $124.4 million at March 31, 2001 from $117.6 million at December 31,
2000. The increase in the Company's asset size was attributable to an increase
in federal funds sold which was primarily funded by the $5.0 million of FHLB
advances received during the quarter ended March 31, 2001.
Loans receivable deceased $1.1 million, or 2.3%, to $46.2
million at March 31, 2001 from $47.3 million at December 31, 2000. The decrease
in loans receivable resulted from a combined impact of decreased loan
origination volume of $758,000, and an increase in principal repayments on loans
receivable.
Mortgage-backed securities were $15.6 at March 31, 2001 and
December 31, 2000. Investment securities decreased $7.3 million, or 18.9%, to
$31.5 million at March 31, 2001, from $38.8 million at December 31, 2000. The
proceeds of maturing investment securities, calls and sales, the principal
repayment on mortgage-backed securities were invested into short-term
interest-bearing deposits.
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Cash, interest-bearing deposits and federal funds sold, on a
combined basis, increased $16.7 million, or 143.1%, to $28.4 million at March
31, 2001 from $11.7 million at December 31, 2000. The proceeds of maturing
investment securities, calls and sales, the principal repayment on
mortgage-backed securities and the increased funds in savings deposit were
invested into short-term, interest-bearing deposits.
LIABILITIES. Deposits increased $1.7 million, or 1.8% during
the three months ended March 31, 2001. Borrowed money increased $5.0 million as
a result of new borrowings from the FHLB during the three months ended March 31,
2001.
Over the last several years, the Company has maintained a
deposit relationship with Gilster-Mary Lee Corporation, (Gilster-Mary Lee), a
food manufacturing and packaging company headquartered in Chester, Illinois. The
Chairman of the Board of the Company is also the Executive Vice President,
Treasurer and Secretary of Gilster-Mary Lee. That relationship has provided as
much as $25 million in funds on deposit, typically with short terms. At March
31, 2001 and December 31, 2000, the balance of funds on deposit with the Company
was $22.4 million, and $24.1 million, respectively.
RESULTS OF OPERATIONS
The Company's operating results depend primarily on its level
of net interest income, which is the difference between the interest income
earned on its interest-earning assets (loans, mortgage-backed securities,
investment securities, and interest-bearing deposits) and the interest expense
paid on its interest-bearing liabilities (deposits and borrowings). Operating
results are also significantly affected by provisions for loan losses,
noninterest income, and noninterest expense. Each of these factors is
significantly affected not only by the Company's policies, but, to varying
degrees, by general economic and competitive conditions and by policies of
federal regulatory authorities.
NET INCOME. The Company's net income for the three months
ended March 31, 2001 was $247,000 compared to $252,000 for the three months
ended March 31, 2000. The $6,000 decrease in net income for the three months
ended March 31, 2001 was the result of a decline in net interest income,
positively offset by an increase in noninterest income combined with a decline
in noninterest expense.
NET INTEREST INCOME. Net interest income totaled $862,000 for
the three months ended March 31, 2001 compared to $932,000 for the three months
ended March 31, 2000. The $70,000, or 7.5%, decrease in net interest income was
the result of an increase in the average yield on interest-bearing liabilities
to 4.58% for the three months ended March 31, 2001 from 4.27% for the three
months ended March 31, 2000. The interest rate spread for the three months ended
March 31, 2001 decreased to 2.43% from 2.77% for the comparable 2000 period.
INTEREST INCOME. Interest income on loans receivable decreased
$15,000, or 1.5%, for the three months ended March 31, 2001. The decrease in
interest income on loans receivable was the result of a $1.4 million, or 2.9%,
decrease in the average balance of loans receivable, positively offset by a 12
basis point increase on the average yield on loans receivable for the three
months ended March 31, 2001.
Interest income on mortgage-backed securities decreased
$74,000 for the three months ended March 31, 2001. The decrease resulted from a
decrease in the average balance of mortgage-backed securities, partially offset
by an increase in the average yield on mortgage-backed securities. For the three
months ended March 31, 2001, the average balance of mortgage-backed securities
decreased $5.1 million, or 24.3%. Management invested the funds received from
the repayments of mortgage-backed securities into short-term, interest-bearing
deposits.
Interest earned on investment securities was $574,000 for the
three months ended March 31, 2001, compared to $599,000 for the three months
ended March 31, 2000. The $25,000, or 4.2% decrease in interest income on
investment securities was the result of a decrease in the average balance of
investment securities of $3.3 million, or 8.2%, positively offset by an increase
in the average yield on investment securities
12
13
to 6.55% for the three months ended March 31, 2001 from 6.27% for the three
months ended March 31, 2000. The decrease in the average balance on investment
securities was due to managements decision to invest funds from maturities, call
and sales into short-term, interest-bearing deposits while longer term
investment opportunities were evaluated.
Interest income on interest-bearing deposits increased
$182,000, or 618.0%, during the three months ended March 31, 2001. The increase
primarily resulted from an increase in the average balance of interest-bearing
deposits of $14.2 million, or 483.3%, combined with a 86 basis point increase in
the average yield on interest-bearing deposits for the three months ended March
31, 2001. The increase in the average balance on interest-bearing deposits
resulted primarily from management's decision to invest excess funds into
short-term, interest-bearing deposits while longer term investment opportunities
were evaluated.
INTEREST EXPENSE. Interest expense on savings deposits
increased $150,000, or 15.6%, to $1.1 million for the three months ended March
31, 2001 from $960,000 for the three months ended March 31, 2000. The average
balance of deposits increased $5.7 million, or 6.3%, combined with an increase
in the average cost of deposits to 4.58% for the three months ended March 31,
2001 from 4.20% for the three months ended March 31, 2000.
Interest expense on borrowed money decreased $11,000 for the
three months ended March 31, 2001. The decrease in interest expense on borrowed
money was attributable to the decline the average balance in borrowed money for
the comparable three month periods ending March 31, 2001 and 2000, respectively.
Interest expense on FHLB advances was $50,000 for the three
months ended March 31, 2001, compared to $31,000 for the three months ended
March 31, 2000. The increase in interest expense on FHLB advances was the result
of a $1.7, or 73.0%, increase in the average balance of FHLB advances for the
three months ended March 31, 2001.
There was no interest expense on federal funds purchased
during the three months ended March 31, 2001, whereas interest expense on
federal funds purchased was $30,000 for the three months ended March 31, 2000.
The decrease in interest expense on federal funds purchased was the result of a
$1.9 million, or 100.0%, decrease in the average balance of federal funds
purchased for the three months ended March 31, 2001.
PROVISION FOR LOAN LOSSES. The allowance for loan losses is
established through a provision for loan losses charged to expense based on
management's evaluation of the risk inherent in its loan portfolio and the
general economy. Such evaluation considers numerous factors including general
economic conditions, loan portfolio composition, prior loss experience, the
estimated fair value of the underlying collateral, and other factors that
warrant recognition in providing for an adequate loan loss allowance.
During the quarters ended March 31, 2001 and 2000, the
provision for loan losses was zero as no significant problem loans were
identified and the allowance for loan losses was deemed by management to be
adequate.
The Company's allowance for loan losses was $598,000, or 1.3%,
of loans outstanding at March 31, 2001 and December 31, 2000. The Company's
level of net loans charged-off during the three months ended March 31, 2001 was
zero. Based on current levels in the allowance for loan losses in relation to
loans receivable and delinquent loans, management's continued effort to
favorably resolve problem loan situations, and the low level of charge-offs in
recent years, management believes the allowance is adequate at March 31, 2001.
At March 31, 2001, loans 90 days or more delinquent totaled $264,000, or .57% of
net loans receivable, compared to $130,000, or .27% of net loans receivable at
December 31, 2000, and $84,000, or .17% of net loans receivable at March 31,
2000.
The breakdown of general loss allowances and specific loss
allowances is made for regulatory
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accounting purposes only. General loan loss allowances are added back to capital
to the extent permitted in computing risk-based capital. Both general and
specific loss allowances are charged to expense. The financial statements of the
Company are prepared in accordance with generally accepted accounting principles
(GAAP) and, accordingly, provisions for loan losses are based on management's
assessment of the factors set forth above. The Company regularly reviews its
loan portfolio, including problem loans, to determine whether any loans are
impaired, require classification and/or the establishment of appropriate
reserves. Management believes it has established its existing allowance for loan
losses in accordance with GAAP, however, future additions may be necessary if
economic conditions or other circumstances differ substantially from the
assumptions used in making the initial determination.
NONINTEREST INCOME. Noninterest income was $61,000 for the
three months ended March 31, 2001 compared to $13,000 for the three months ended
March 31, 2000. The increase in noninterest income for the three months ended
March 31, 2001 was mainly attributable to a $11,000 net gain realized on the
sale of available for sale investment securities and a $11,000 increase in fee
income.
NONINTEREST EXPENSE. Noninterest expense decreased $16,000, or
2.7%, for the three months ended March 31, 2001. The decrease in noninterest
expense for the three months ended March 31, 2001 resulted from a $12,000
decrease in compensation expense and a $10,000 decrease in other expense,
partially offset by an $8,000 increase in occupancy expense. Each of these
fluctuations are the result of normal operating procedures.
INCOME TAX EXPENSE. Income tax expense for the three months
ended March 31, 2001was $99,000 compared to $100,000 for the three months ended
March 31, 2000. The Company's effective tax rate for the three months ended
March 31, 2001 was 28.7% compared to 28.4% for the three months ended March 31,
2000. The effective tax rate for each period was below the statutory rate of 34%
due to the Company's investment in tax exempt securities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds consist of deposits,
securities sold under agreements to repurchase, federal funds purchased, FHLB
advances, repayments and prepayments of loans and mortgage-backed securities,
maturities of investments and interest-bearing deposits, and funds provided from
operations. While scheduled repayments of loans and mortgage-backed securities
and maturities of investment securities are predictable sources of funds,
deposit flows and loan prepayments are greatly influenced by general interest
rates, economic conditions and competition. The Company manages the pricing of
its deposits to maintain a steady deposit base. The Company uses its liquidity
resources principally to fund existing and future loan commitments, to fund
maturing certificates of deposit and deposit withdrawals, to invest in other
interest-bearing assets, to maintain liquidity, and to meet operating expenses.
Management believes that loan repayments and other sources of funds will be
adequate to meet the Company's liquidity needs for the remainder of 2001.
A major portion of the Company's liquidity consists of cash
and cash equivalents, which include investments in highly liquid, short-term
deposits. The level of these assets is dependent on the Company's operating,
investing, lending and financing activities during any given period. At March
31, 2001, cash and cash equivalents totaled $28.4 million.
The primary investing activities of the Company include
origination of loans and purchase of mortgage-backed securities and investment
securities. During the three months ended March 31, 2001, purchases of
investment securities and mortgaged-backed securities totaled $12.2 million
while loan originations totaled $2.2 million. These investments were funded
primarily from loan and mortgage-backed security repayments of $4.5 million and
investment securities sales, calls and maturities of $18.6 million.
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Liquidity management is both a daily and long-term function of
business management. If the Company requires funds beyond its ability to
generate them internally, the Company believes that it could borrow by
purchasing federal funds or borrow funds from the Federal Home Loan Bank (FHLB).
At March 31, 2001, the Company had $5.0 million in outstanding advances from the
FHLB.
March 31, 2001, the Company exceeded all of its regulatory
capital requirements. The Company and the Company's subsidiary banks actual and
required capital amounts and ratios as of March 31, 2001 are as follows:
Actual Capital Requirements
----------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------
Total capital (to risk-weighted assets):
Company $ 20,380 42.5% 3,834 8.00%
Chester National Bank $ 15,977 38.6% 3,307 8.00%
Chester National Bank of Missouri $ 3,502 58.0% 483 8.00%
Tier 1 capital (to risk-weighted assets):
Company $ 19,827 41.4% 1,917 4.00%
Chester National Bank $ 15,500 37.5% 1,654 4.00%
Chester National Bank of Missouri $ 3,426 56.7% 242 4.00%
Tier 1 capital (to average assets):
Company $ 19,827 16.2% 3,674 3.00%
Chester National Bank $ 15,500 14.2% 3,285 3.00%
Chester National Bank of Missouri $ 3,426 29.0% 355 3.00%
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
results of operations in terms of historical dollars without considering changes
in the relative purchasing power of money over time because of inflation. Unlike
most industrial companies, virtually all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
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NONPERFORMING ASSETS
The following table sets forth information with respect to the Company's
nonperforming assets at the dates indicated.
At March 31, At December 31,
------------ ---------------
2001 2000
---- ----
(Dollars in Thousands)
---------------------------------------
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real estate
Residential real estate $252 $115
Commercial -- --
Consumer 12 15
---- ----
Total 264 130
---- ----
Accruing loans which are contractually past due 90 days or more:
Residential real estate -- --
Commercial -- --
Consumer -- --
---- ----
Total -- --
---- ----
Total non-performing loans 264 151
Real estate acquired by foreclosure, net 46 145
---- ----
Total non-performing assets $310 $275
==== ====
Total non-performing loans to net loans 0.57% 0.27%
======= =======
Total allowance for loan losses to
non-performing loans 226.38% 460.17%
======= =======
Total non-performing assets to total assets 0.25% 0.23%
======= =======
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Chester Bancorp, Inc., and Subsidiaries
Three Months Ended March 31,
- ---------------------------------------------------------------------------------------------------------------
2001
--------------------------------------------------------------------
Average
Average Yield/
Balance Interest Cost
-------------------- ------------------ ---------------------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net $ 47,082 $ 988 8.39%
Investments, net (1) 37,412 613 6.55%
Mortgage-backed securities, net 15,887 247 6.22%
Interest-bearing deposits 17,125 212 4.95%
-------------------- ------------------ ---------------------
Total interest-earning assets 117,506 2,060 7.01%
------------------ ---------------------
Noninterest-earning assets 4,969
--------------------
Total assets $ 122,475
====================
Interest-bearing liabilities:
Deposits $ 97,045 1,110 4.58%
Federal funds purchased 0 0 0.00%
FHLB advances 4,167 50 4.80%
-------------------- ------------------ ---------------------
Total interest-bearing liabilities 101,212 1,160 4.58%
------------------ ---------------------
Noninterest-bearing liabilities 1,435
--------------------
Total liabilities 102,647
Retained earnings 19,828
--------------------
Total liabilities and retained
earnings $ 122,475
====================
Net interest income $ 900
==================
Interest rate spread 2.43%
=====================
Net interest margin 3.06%
=====================
Ratio of average interest-earning assets
to average interest-bearing liabilities 116.10%
=====================
--------------------------------------------------------------------
2000
--------------------------------------------------------------------
Average
Average Yield/
Balance Interest Cost
-------------------- ------------------ ---------------------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net $ 48,485 $ 1,003 8.27%
Investments, net (1) 40,760 639 6.27%
Mortgage-backed securities, net 20,989 321 6.12%
Interest-bearing deposits 2,936 30 4.09%
-------------------- ------------------ ---------------------
Total interest-earning assets 113,170 1,993 7.04%
------------------ ---------------------
Noninterest-earning assets 5,626
--------------------
Total assets $ 118,796
====================
Interest-bearing liabilities:
Deposits $ 91,332 960 4.20%
Federal funds purchased 1,917 30 6.26%
FHLB advances 2,418 31 5.13%
-------------------- ------------------ ---------------------
Total interest-bearing liabilities 95,667 1,021 4.27%
------------------ ---------------------
Noninterest-bearing liabilities 2,199
--------------------
Total liabilities 97,866
Retained earnings 20,930
--------------------
Total liabilities and retained
earnings $ 118,796
====================
Net interest income $ 972
==================
Interest rate spread 2.77%
=====================
Net interest margin 3.44%
=====================
Ratio of average interest-earning assets
to average interest-bearing liabilities 118.30%
=====================
(1) Tax exempt state and municipal securities are presented on a tax equivalent
basis.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There has been no material change to the market risk position of the
Company from the end of the last fiscal year on December 31, 2000.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Neither the Company nor the Banks are a party to any material legal
proceedings at this time. From time to time, the Banks are involved in
various claims and legal actions arising in the ordinary course of
business.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
On March 9, 2001, the Company solicited proxies for the annual meeting
of stockholders of the Company held on April 6, 2001. The meeting involved the
election of two directors. The directors up for election were elected by the
vote of 1,125,593 shares for Allen Verseman and 1,125,797 shares for Carl Welge
out of 1,129,522 shares present at the meeting, either in person or by proxy.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
None
B. Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.
Chester Bancorp, Inc.
By: /s/ Michael W. Welge
---------------------------------------------
Michael W. Welge
Chairman of the Board, President and Chief
Financial Officer
(Duly Authorized Officer)
Dated: May 8, 2001
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